Why China’s manufacturing PMI falls while global PMI rises

Market Realist

Are dry bulk shippers braving favorable economic waters? (Part 3 of 8)

(Continued from Part 2)

Intertwined global market

Since China is a major importer of iron ore and coal, it’s obvious that investors should follow economic data coming out of the world’s largest manufacturing center. But this doesn’t mean investors should ignore activity outside of China, because global economic activity is intertwined.

China’s export market

According to the World Bank, between 2009 and 2013, China’s export made up about 27% of the country’s GDP (gross domestic product), which is a significant chunk. The World Trade Organization further breaks down China’s main export partners as the United States, EU-27, and Hong Kong—each making up roughly 16% of China’s total export value. What we’re trying to assess is whether global economic data will support China. To do this, one quick indicator that could give us the answer is the Global Manufacturing PMI.

Global manufacturing ends on a high note

The Global Manufacturing PMI is basically a globalized and standardized version of individual countries’ PMI. Although China saw some weakness in December, the Global Manufacturing PMI ended 2013 on a high note of 52.70, up from 51.60 in November. These were largely driven by loose monetary policies used to calm the financial system, make loans affordable and available, and encourage spending—which worked. Global markets overall are up double digits in 2013.

China’s future economy will be more consumption-dependent. This isn’t going to happen overnight—although we shouldn’t discount its potential. To go through this change, the country needs a favorable environment. Workers in China don’t really listen to news outside of their own world, but their prospects are still tied to the global economy. If global demand is weak, so too will be their spending power and drive to consume. So if we continue to see favorable figures off the global manufacturing PMI, we should see dry bulk shippers benefit.

Ending note

On a last note, soft data is useful because it’s timely. It’s published right after a month ends. However, it won’t tell us exactly how fast the manufacturing sector is performing, and it’s subject to psychological factors. So we’ll take a look at hard data in the next few articles of this series.

Continue to Part 4

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